5 Ways Manufacturing Companies Benefit from Asset-Based Lending
Manufacturing companies are facing extraordinary challenges to stay competitive in today’s ever-changing COVID economy. Manufacturing companies can benefit from asset-based lending because now more than ever, cash is king and is a necessity to run production lines and to ensure future viability.
#1: Improve Liquidity
Asset-based lending provides your company improved liquidity. When used properly, the lending facility provides financial stability and predictable cash flow. This benefit can help stabilize operations for companies that are growing rapidly, have tight cash flows, or have inconsistent revenues.
#2: Existing Assets Serve as Collateral
An asset-based line of credit is secured by tangible assets, usually your company’s own accounts receivable, inventory, machinery, or equipment. Businesses can typically borrow up to 85% of their eligible A/R, 50% of inventory, and 75% of machinery and equipment. When comparing asset-based loans to other business lending, it’s often easier to qualify for because the tangible collateral mitigates lender risk.
#3: Perfect for Seasonal Needs
Because asset-based lending relies on the assets you already have, asset-based loans are great for manufacturers that have seasonality and present drastically different high and low revenue generating periods. Asset-based lending provides an influx of cash to help balance out the time period between starting the service/project and receiving payment on your accounts.
#4: Fulfill One-Time Contracts
In manufacturing, one big contract can require an immediate need for additional financing, which traditional bank lines of credit are typically not set up to accommodate. To increase your bank line of credit, you may need to wait as many as 30-60 days for a review, as well as pay additional fees to have your line increased.
Asset-based lenders who specialize in the manufacturing industry understand that needs change quickly. They can often increase your credit line quickly, rather than often waiting weeks. This speed and flexibility can mean the difference between landing that big new contract or having the opportunity pass by.
#5: Manage the Ups & Downs of Your Business Cycles
Asset-based loans work well for companies with cyclical sales cycles. Many manufacturers experience cyclical revenue, either because of their market or industry. Borrowing based on cash flows may not offer the available credit to sufficiently fund their busiest times or high volumes. Asset-based loans are revolving lines of credit so they continue to have an ongoing repayment process as opposed to taking out long-term debt which requires monthly payments, which can be difficult to handle in an off or down month.
Flexible Lending with Certainty During Uncertain Times
Asset-based lending is an attractive option during uncertain economic times. When the economy is lagging, manufacturers’ balance sheets tend to decline slower than the revenue rate. When the economy is growing, asset-based lending helps businesses deal with cash flow that lags behind revenue growth. Overall, asset-based lending gives companies flexibility and access to capital not available with traditional financing.